How digital banking will evolve over the next 5 years

Community and regional banks can adopt nimble technology to stay competitive against major players.

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As the banking industry trends toward digital growth, there is an opportunity for community and regional banks to adopt nimble technology and stay competitive against major players.

2020 has been a year of disruptions, casting the last decade of banking industry trends into a new light. But will these disruptions translate into major shifts or further acceleration — especially with regard to digital growth — over the next five years?

Looking ahead, we predict further ascendance of the banks at the top, but see opportunities for smaller, nimbler banks to remain competitive when it comes to digital banking innovation.

The shift toward digital banking

The past 10 to 15 years have been marked by the continuous growth of large banks and a dramatic turn toward technological investment. In 2008, many stakeholders described the country’s major banks as “too big to fail.” Since then, these big banks have grown even bigger, capturing more market share through a heavy investment in digital services. By 2018, the market share of the largest banks had expanded to 59 percent, up from 47 percent in 2006. In terms of domestic deposits, in 2019 the top four banks claimed nearly 35 percent.

These money center banks have built a global presence. As a result of their dominance, community banks and credit unions now hold a smaller percentage of the market while consolidating at unprecedented rates. In fact, the number of commercial banks has dramatically decreased in recent years — there were 4,513 banks in the U.S. in 2019, down from nearly 7,000 in 2009. Yet, the industry’s turn toward technological innovation is making room for competition as banks of all sizes invest in the best digital solutions.

The last ten years have also seen a major decrease in branch development. In total, the number of full service bank branches in the U.S. dropped to 83,292 in 2019, down from a height of nearly 96,000 10 years prior. Expenditure that once went toward branch development is now going toward digital banking technologies. These tech offerings are a major selling point for consumers, as they can make the banking experience easier and more accessible. Further, digital technology can drive major cost savings for banks by streamlining operations and automating previously time-consuming tasks.

Disruptions and opportunities in 2020

Today, big banks are continuing to grow at historic rates. Banks have seen an unprecedented influx of deposits — $2.4 trillion since January, according to the FDIC, with gains going primarily to the big banks, including JPMorgan Chase, Bank of America, and Citigroup.

Despite 2020’s disruptions — or conversely, because of them — this may well be the year to innovate. COVID-19 in particular offers a compelling reason for banks to step up their digital banking efforts. In-person interactions are limited, and even in areas where banks have reopened, many customers may not feel safe. This preference for remote banking is likely to continue into the future as well. Qualtrics XM Institute, as reported in Forbes, found that 80 percent of people who started to bank online are at least somewhat likely to continue.

That being said, COVID-19 is just another tick in the column of digital banking. Many community banks have already adopted online service options in the past few years. For these banks, their efforts to make digital banking more user-friendly and efficient is paying dividends. For instance, Cross River Bank, a community bank in Northern New Jersey, was able to emerge as one of the top Paycheck Protection Program (PPP) lenders while simultaneously gathering $250 million in deposits in just 15 days. As innovative banking technology becomes more readily available, community banks will have convenient alternatives to legacy vendors that don’t require a massive budget.

What’s next in digital banking

Banking will continue to evolve rapidly over the next five years. In particular, community institutions should take heed of the following four trends.

1. Hyper-localized products will help community banks compete with larger institutions

Community institutions should focus on overall product offering, not just rates. Digital solutions can offer better tools to connect with the local community, as well as expand a bank’s customer base nationwide. A major trend to consider is verticalized banking. The big banks aren’t capable of delivering hyper localized or targeted offerings to the same extent. While these services already exist for certain demographics such as military personnel and students, we’re seeing this expand to female entrepreneurs, minority owned businesses, and even tech developers. These types of strategies will become increasingly critical in attracting and retaining clients.

2. Banks are leveraging technology to deepen community relationships

COVID-19 relief efforts have created an opening for tech-savvy community banks and credit unions to win market share and goodwill among small businesses and their communities at-large. Such relief efforts will likely continue to be a major area for investment and innovation over the next few years.

During an economic downturn, when impacts can be felt in some locales more than others, a wider reach may help regional institutions avoid some risk while continuing to grow. Standout community banks are then turning financial success into community support, with initiatives focused on helping local businesses and families. A prime example of this is New York-based Quontic Bank’s #BetheDrawbridge campaign. Quontic launched its new Drawbridge Savings Account nationwide with the aim of matching a portion of interest paid to account holders into a fund providing financial relief to New York City families and businesses. Not only is the bank leveraging digital account opening to broader its footprint, but also building goodwill within its homebase.

3. Real-time transaction monitoring becomes table stakes to compete online

While the US has been slow to adopt real-time payments (RTP), the time is near. The Federal Reserve is working to release its RTP network, FedNow, by 2024 and The Clearing House’s RTP Network is expecting to have as many as 400 participating institutions by the end of 2020.

Community banks should prepare for real-time banking, not only through the implementation of real-time digital servicing but also through real-time transaction monitoring. Money moves today, and if banks don’t get a report until the next morning, it’s too late. As real-time payments become more accessible, real-time transaction monitoring will be table stakes in order to prevent fraud, mitigate costs and stay competitive.

4. The business banking experience will see major growth and user-friendly improvements

Commercial banking has lagged behind consumer services and remained very manual and paper-based. The challenges of PPP deployment was a major reckoning for the banking industry. Fortunately, the innovations that have emerged in personal banking are now making their way to commercial. For technology firms and financial institutions alike, this will be a major area of focus for the next 12-24 months.

Looking ahead with MANTL

During the next five years, smaller banks will need to double down on digital banking trends, taking advantage of their nimble capabilities. That being said, these banks shouldn’t have to worry about the time and expense of building out in-house technical solutions. The best way for banks to fast-track digital offerings is to find the right partner and products for their needs.

For instance, MANTL’s online account opening platform offers a user-friendly way for customers to open a new account online in just a few minutes. Our technology is a proven solution for improving conversion rates, with automation technology that helps onboard customers at a fraction of the typical cost. In this era of digital growth, the right tools can make all the difference.

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